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For first-timer home buyers, there’s no longer a handy rule of thumb about how much to spend

New research shows the challenges new buyers face in today’s housing market.
New research shows the challenges new buyers face in today’s housing market. (Andrii Yalanskyi/Alamy Stock Photo)
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New research sheds fresh light on one of the most frequently asked home-buying questions, especially for first-timers: With our annual income, what price house can we afford? Is there some handy rule of thumb?

Decades ago, a commonly quoted price-to-income guideline was that you can afford a house that costs about two times your gross annual household income. So back then, if you and your spouse or partner earned a combined $50,000 a year, you could probably afford a $100,000 house. In later decades, the ratio crept up to three times income, and even higher in some areas.

So what is it today? A study by housing researchers at the American Enterprise Institute’s Center on Housing Markets and Finance came up with some intriguing answers. They examined the incomes, home prices and square footage associated with the purchase transactions of 543,000 first-timers during 2017. Stripped of individuals’ identities, the data came from the actual loan files of buyers who obtained mortgages from Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), VA and Rural Housing Services in the 50 largest U.S. metropolitan areas. As a group, these agencies’ loans account for approximately 90 percent of all first-time home purchases.

What researchers Edward Pinto and Tobias Peter found is there is no magic price-to-income rule of thumb for gauging affordability that fits everywhere, although the median ratio nationwide was 3.3. As with everything in real estate, location plays a crucial role; ratios in the study ranged from an affordably modest 2.3 to a hyper-expensive 5.0. The top 10 least-affordable markets had median buyer incomes that were 51 percent higher than those in the 10 most affordable areas.

Pittsburgh, with a 2.3 ratio, was the most affordable housing market for first-timers. It was followed closely by Cleveland (2.4), Cincinnati (2.6) and Oklahoma City (2.7). In metropolitan Chicago, the ratio was 2.9; in Miami 3.5; New York 3.6; Washington 3.8; and Boston 3.9. The least affordable markets, not surprisingly, were along the West Coast: San Diego, where the price-to-income ratio hit 4.5; San Francisco (4.6) and San Jose (5.0).

In metropolitan Washington, first-timers bought houses or condos with a median price of $355,000. In the New York metro, the median was $365,000. In San Francisco, $560,000; in San Jose, $650,000. Imagine having to save up your money to buy your first home for more than a half-million bucks, and the place you buy is a two-bedroom, 1,200-square-foot starter home — yikes!

How do first-timers manage to do it? One crucial element is that there are relatively generous financing options compared with previous decades: Fannie Mae and Freddie Mac offer 3-percent-down options and have begun permitting applicants’ debt-to-income ratios (DTIs) to go as high as 50 percent. FHA offers first-timers not only low minimum down payments (3.5 percent) but also exceptionally sympathetic treatment on credit issues and the mortgage industry’s highest DTIs — in excess of 50 percent. VA loans require no down payment.

Paul Skeens, president of Colonial Mortgage Group in Waldorf, Md., says he has watched pricing rules-of-thumb ratios in his market area push higher for a couple of decades — from three times income in the late 1980s to four times income at the height of the housing boom in 2006.

But qualifying for a specific loan amount — which sets the upper limit on what you can buy — cannot really be reduced to a ratio, he says. It’s all about buyers’ individual circumstances. He sees applicants with good incomes and credit but who are carrying student-loan debts requiring hundreds of dollars a month in repayments.

“Student debts are killing these guys,” he told me, because the payments knock applicants’ DTIs beyond what’s acceptable even under loosened guidelines. For debt-burdened individuals like these, there is no price-to-income ratio rule of thumb. They are out of the game.

Marty Soller, a real estate agent with Coldwell Banker King Thompson in the Columbus, Ohio, area, sees the same problem holding back many would-be first-timers, complicated in some cases by child-care costs that can run “easily $1,000 a month per child.”

The takeaway here? Note that the new study focused on the ratios that buyers across the country actually experienced last year, which turned out to be a median 3.3 times income for the cost of their first home. Your own price limit, however, may well turn on issues directly related to you, especially the monthly debts you’re lugging around.

Ken Harney’s email address is